IN THE FEDERAL COURT OF MALAYSIA

(APPELLATE JURISDICTION)
CIVIL APPLICATION NO. 03-2-11/2018 (B)

BETWEEN

TINDAK MURNI SDN BHD

(No. Syarikat : 235180-X) … APPELLANT

AND

JUANG SETIA SDN BHD

(No. Syarikat : 299938-A) … RESPONDENT

In the Court of Appeal of Malaysia

(Appellate Jurisdiction)
Civil Appeal No. B-03(IM)(NCVC)-102-12/2017

Between

Juang Setia Sdn Bhd

(No. Syarikat : 299938-A) … Appellant

And

Tindak Murni Sdn Bhd

(No. Syarikat : 235180-X) … Respondent

HEARD TOGETHER

1
 IN THE FEDERAL COURT OF MALAYSIA
(APPELLATE JURISDICTION)
CIVIL APPLICATION NO. 02(i)-104-11/2018 (B)

BETWEEN

TINDAK MURNI SDN BHD

(No. Syarikat : 235180-X) … APPELLANT

AND

JUANG SETIA SDN BHD

(No. Syarikat : 299938-A) … RESPONDENT

In the Court of Appeal of Malaysia

(Appellate Jurisdiction)
Civil Appeal No. B-02(IM)(NCVC)-2542-12/2017

Between

Juang Setia Sdn Bhd

(No. Syarikat : 299938-A) … Appellant

And

Tindak Murni Sdn Bhd

(No. Syarikat : 235180-X) … Respondent

In the High Court of Malaya at Shah Alam

Civil No. BA-22NCVC-70-02/2017

2
 Between

Juang Setia Sdn Bhd

(No. Syarikat : 299938-A) … Plaintiff

And

Tindak Murni Sdn Bhd

(No. Syarikat : 235180-X) … Defendant

CORAM:

TENGKU MAIMUN BINTI TUAN MAT, CJ

AZAHAR BIN MOHAMED, CJM
NALLINI PATHMANTHAN, FCJ
VERNON ONG LAM KIAT, FCJ
ABDUL RAHMAN BIN SEBLI, FCJ

GROUNDS OF JUDGMENT

Introduction

1. When the governing contract between two parties provides for

an agreement to arbitrate, should that arbitration agreement be
subordinated to a judgment in default obtained in court proceedings,
contrary to the terms of the governing contract and effectively
rendering the agreement to arbitrate, nugatory?

3
2. This was the issue in the two related appeals before us. It
necessarily involves a comprehension and application of section 10
of the Arbitration Act 2005.

3. In the instant case, one of the contracting parties initiated court

proceedings, notwithstanding the existence of an arbitration clause.
As no appearance was entered by the other party, judgment in default
was obtained. When an application to set aside the judgment in
default fell to be determined, together with an application for a stay
pending arbitration, the issues before the courts below included the
following:

(a) Whether the arbitration agreement or the proceedings in

court obtained despite the agreement to arbitrate took
precedence;

(b) Whether the judgment in default ought to be set aside.

4. On 19 September 2019 we heard both appeals one after the

other in relation to the following questions of law:

1) Can a judgment in default in court be sustained when the

plaintiff who obtained the judgment in default is bound by
a valid arbitration agreement/clause and the defendant
has raised disputes to be ventilated via arbitration
pursuant to the arbitration clause?

2) Should the court in hearing an application to set aside the

judgment in default where a valid arbitration clause is

4
 binding on parties consider the “merits” or “existence” of
the disputes raised by the defendant?

5. We allowed both appeals, answered both questions in the

negative, and restored the decision of the High Court. Below we set
out our full reasons for doing so.

Salient Factual Background and Chronology of Court

Proceedings Leading to These Appeals

6. The Appellant before us, Tindak Murni Sdn Bhd was the
defendant in the High Court at Shah Alam in Civil Suit No. BA-22-
NCVC-70-02/2017 (‘the civil suit’). The Respondent, Juang Setia Sdn
Bhd, was the plaintiff that initiated the civil suit.

7. As stated earlier Tindak Murni Sdn Bhd, the employer

(‘Employer’) and defendant in the civil suit, entered into a Building
Construction Contract with Juang Setia Sdn Bhd, the contractor
(‘Contractor’) and plaintiff in the civil suit.

8. The building contract is dated 1 June 2015. It related to a project

for the construction of the remaining portions of a main access road,
earthworks and infrastructure works in relation to 428 condominium
units in Dengkil, Selangor. It is a standard form Pertubuhan Akitek
Malaysia (‘PAM’) contract. Disputes arose between the parties
resulting in the Contractor initiating the civil suit. The suit was initiated
notwithstanding the clear and unambiguous provision requiring
parties to refer any dispute or difference arising between them in

5
relation to any matter arising in connection with the contract, to
arbitration.

Salient Clauses of the Building Contract

9. Clause 34 of the contract provides for an agreement to arbitrate

in respect of any and all disputes arising between the parties in
relation to the contract.

10. Clauses 34.2 to 34.6 provide for the process of arbitration and
the provision of an award, which is binding on the parties.

11. Clause 34.4 stipulates that the Arbitrator shall have power to
open up, review and revise any, inter alia, certificate and to determine
all matters in dispute submitted to him as if no such certificate had
been given.

The Dispute

12. Works proceeded under the contract. On 29 January 2016, the

architect issued a Certificate of Practical Completion certifying that the
works were satisfactorily completed.

13. The Contractor maintained that the Employer failed to make

payment of a sum totalling RM1,702,870-37 due to it. The parties
entered into negotiations in respect of this dispute, but failed to
resolve it. This resulted in the Contractor issuing a ‘notice of
determination’ on 29 August 2016. The effect of this notice was to give
the Employer seven days to remedy the breach of the agreement.

6
There was no response from the Employer as a result of which the
Contractor issued a notice of termination of the contract pursuant to
Clause 26.1(i) of the contract.

14. The Contractor then filed the civil suit. The claim was for the
sum alleged to be owing to it under three interim certificates
amounting to RM2,684,924-55 being the value of works done.

15. The Employer paid the Contractor the sum of RM1,143,149-65,

maintaining, inter alia, that there was a dispute between the parties
relating to material defects, warranting a set-off or complete defence
to the claim.

16. No appearance was filed within the requisite time period

allowed, as a consequence of which the Contractor obtained a
judgment in default against the Employer on 1 March 2017.

17. The Employer then filed a notice of application dated 10 April

2017 to set aside the judgment in default. The bases for the
application were that:

(a) The Employer had valid disputes against the Contractor’s

claims; and
(b) The existence of the arbitration clause

18. The application to set aside the judgment in default was first
heard before the Registrar of the High Court who determined that
there was a defence on the merits in that there were disputes and/or

7
triable issues justifying the matter being heard on its merits.
Accordingly the judgment in default was set aside on 31 July 2012.

19. The Employer as defendant did not file a defence as this would
constitute a ‘step in the proceedings’ precluding the referral of the
matter to arbitration. An application for a stay pending arbitration
instead was filed on 10 August 2017. The objective was to stay the
court proceedings pending arbitration premised on the arbitration
clause.

20. The Contractor appealed to the Judge in Chambers against the

decision of the Registrar. The Judge heard both:

(a) The appeal against the order setting aside the judgment
in default; and
(b) The application for a stay pending arbitration.

21. The Judge:

(a) Dismissed the appeal against the setting aside of the

judgment in default; and
(b) Allowed the Employer’s application for a stay pending
arbitration on 14 November 2017.

22. In so determining the High Court Judge found, inter alia that:
(i) There was a defence on the merits as there were issues
or disputes of fact that required resolution at trial, in
relation to the Employer’s contention that there were

8
 defects in the work undertaken which precluded recovery
of the sum claimed by the Contractor; and

(ii) There was a valid arbitration clause that parties had

agreed to be bound by. Applying section 10 of the
Arbitration Act 2005, the Judge found that there was
nothing to show that the arbitration agreement between
the parties was null and void, inapplicable, or inoperative.
The court proceedings were therefore stayed pending
referral of the dispute to arbitration.

23. The Contractor then filed 2 appeals to the Court of Appeal

against the decision of the High Court, one in respect of the Judge
upholding the Registrar’s decision to set aside the judgment in default
and the other against the grant of the stay pending arbitration. On 3
May 2018 the Court of Appeal:

(i) Allowed the Contractor’s appeal, reversed the decision of

the High Court to set aside the judgment in default,
effectively granting judgment to the Contractor on the
grounds that there was no defence on the merits; and

(ii) Allowed the Contractor’s second appeal in relation to the

stay pending arbitration, effectively refusing to stay the
court proceedings pending arbitration.

24. In essence the Court of Appeal dealt solely with the setting
aside of the judgment in default. Having concluded that the judgment

9
in default was erroneously set aside, it did not consider or address the
application for a stay pending arbitration.

25. The Court of Appeal dealt with the two applications (i.e. the
setting aside and the stay) separately (as did the High Court), as if the
two had no nexus whatsoever with the other. In dealing with the
application to set aside the judgment in default the Court of Appeal
undertook an extensive study of and provided a treatise on the law
relating to certificates of payment.

26. From paragraphs 31 to 57 of its judgment, it focussed solely and

intricately on this area of the law, citing a multitude of cases to support
the contention that certificates of payment are final in nature.

27. Nowhere is there any mention of the arbitration clause nor the
law relating to arbitration. The Court of Appeal determined that the
certificates of payment in dispute were in fact, conclusive. It thereby
effectively dismissed outright any possibility of defects in the work
done. It then determined that there were no merits in the defence, and
that the High Court had erred in setting the judgment in default aside.
The Court of Appeal then allowed the contractor’s appeal, restoring
the judgment in default. The application for a stay pending arbitration
was simply not addressed at all.

28. The Court of Appeal approached the appeals by starting with

the appeal relating to the setting aside of the judgment in default. Only
after that was the stay appeal considered. In view of the fact that they
had decided that the judgment in default was to be restored, the only
possible conclusion that they could come to was that the stay be

10
dismissed. It was entirely untenable for them to conclude that the stay
ought to be allowed in the face of their finding that the judgment in
default was regular. It was their manner of approaching the two
appeals that led to this result. We were of the view that the approach
adopted by the Court of Appeal was flawed, as we analyse further
below.

Analysis of the Submissions before the Federal Court

(I) The Approach to be Adopted by the Courts in Dealing with

the Two Appeals

29. What approach is to be undertaken by a court faced with two

applications of this nature? Should the appeals have been considered
sequentially but in isolation without any consideration whatsoever of
the other? Or should the appeals have been heard together such that
the issues arising in both applications were available for the court to
consider and then determine which of the two should be accorded
priority?

30. In other words, enabling the court to consider, in light of the

express provisions of section 10 of the Arbitration Act 2005 and the
express provisions of the governing contract between the parties,
whether the judgment in default ought to be subordinated to the
agreement to arbitrate.

11
(II) Submissions for the Employer Prosecuting the Appeals

31. Counsel for the Employer (the appellant) submitted that the
Court of Appeal had erred in failing entirely to consider the arbitration
clause and its effects, particularly in light of section 10 of the
Arbitration Act 2005. It had instead erroneously proceeded to deal
solely with the “merits” of the “dispute”, concluding that there was no
defence on the merits.

32. The Court of Appeal ought, it was contended, to have

considered that a valid arbitration clause together with the disputes
raised by the Employer comprised a valid defence to the Judgment in
default of appearance. The Employer was prejudiced irrevocably by
the Court’s failure to acknowledge or recognise its legal and
contractual rights to have the dispute arbitrated. The Employer had
never acquiesced to the court proceedings and to that end had not
taken ‘any step in the proceedings’.

33. With respect to section 10 of the Arbitration Act 2005 and

general law, it was submitted that it was neither the intention nor
purpose of the law that a judgment in default should supersede or
override an agreement to arbitrate as contained in the arbitration
clause.

34. The Contractor had breached the agreement to arbitrate by

filing the civil suit when there had been neither waiver nor concession
of the agreement to arbitrate. No prejudice would be occasioned to
the Contractor by the setting aside of the judgment in default and
staying the matter pending arbitration, as the dispute would then be

12
dealt with on its merits as parties had originally agreed. By reason of
the decision of the Court of Appeal, the Employer had effectively been
shut out or deprived of its rights to have the matter determined by
arbitration.

35. When the appeals came up for disposal before the High Court,
the judgment in default had already been set aside. Neither had the
Employer taken any step in the proceedings. Pursuant to section 10
of the Arbitration Act 2005 the stay pending arbitration granted by
the High Court ought to have been upheld by the Court of Appeal.
This is more so in light of section 8 of the Arbitration Act 2005 which
prescribes a statutory non-interventionist approach by the Courts, as
well as the principles of party autonomy which underscore the law
relating to arbitration.

(III) Submissions for the Contractor Defending the Appeals

36. Counsel for the Contractor submitted that the appeal on the
default judgment had to be determined first as there would be no need
for the court to consider the appeal on the stay if the default judgment
is maintained. His reasons for this were, inter alia, that:

(a) A reading of clauses 30.2 and 30.3(i) warranted the

conclusion that payments certified under the interim
certificate payments were immediately due and payable
and not subject to deductions or set-offs for defective
works or otherwise. To this end, it was contended, these
payments were ‘carved out’ of the mandatory requirement
to arbitrate;

13
 (b) A judgment of the High Court has constitutional force and
recognition under Article 121(3) of the Federal
Constitution. It stipulates that a judgment of the courts or
a judge has full force and effect according to its tenor
throughout the Federation and may be executed or
enforced accordingly;

(c) The doctrine of merger prevents an arbitration clause from

severing a judgment because the cause of action has
merged in the judgment and the judgment acquires a
higher status per Lord Sumption in Virgin Atlantic
Airways Limited (Respondent) v Zodiac Seats UK
Limited [2013] UKSC 46;

(d) Res judicata prevents the arbitration clause from severing

the judgment per Supreme Court in Asia Commercial
Finance (M) Bhd v Kawal Teliti Sdn Bhd [1995] 3 MLJ
189 where Peh Swee Chin SCJ explained the two kinds
of estoppel, namely issue estoppel and cause of action
estoppel. Reliance was placed on the latter; and

(e) It was also submitted that any subordination of a judgment

of the High Court had to be specifically and deliberately
legislated.

(IV) The Analysis and Reasons for Our Decision

37. The starting point for an analysis of the issues in these appeals
requires firstly a consideration of the arbitration clause in the

14
governing contract so as to ascertain whether it comprises a valid
agreement to arbitrate.

38. The question arises why this should be an initial or primary

consideration. The reason is section 10 of the Arbitration Act 2005,
which sets out the role of the Court when confronted with an
application for a stay pending arbitration. It reads as follows:

“A court before which proceedings are brought in respect of a matter

which is the subject of an arbitration agreement shall, where a party
makes an application before taking any other steps in the
proceedings, stay those proceedings and refer the parties to
arbitration unless it finds that the agreement is null and void,
inoperative or incapable of being performed.” [emphasis ours].

39. The emphasised portions make it clear that the first step is to
ascertain whether there is in fact an agreement to arbitrate in respect
of the dispute in question. (See inter alia TNB Fuel Services Sdn
Bhd v. China National Coal Group Corp [2013] 1 LNS 288).

40. Section 9 of the Arbitration Act 2005 is relevant here. It is

entitled “Definition and form of arbitration agreement”. Subsection
9(1) defines an “arbitration agreement” to mean “an agreement by the
parties to submit to arbitration all or certain disputes which have
arisen or which may arise between them in respect of a defined legal
relationship, whether contractual or not.”

41. The same section goes on to state in subsection 9(2) that an

arbitration agreement may be in the form of an arbitration clause in

15
an agreement, or in the form of a separate agreement. The former
situation is applicable to the present facts.

42. In the instant appeals, the building construction contract (as we

stated earlier) is based on the PAM Form of Contract. The contract
contains the following arbitration clause, which fulfils the requirements
of subsection 9(2) of the Arbitration Act 2005. The agreement to
arbitrate is contained in clause 34 of the governing contract. It reads:

“34.0 Arbitration

34.1 In the event that any dispute or difference arises between the
Employer, or the Architect on his behalf, and the Contractor, either
during the progress or after completion or abandonment of the Works
regarding:

34.1(i) any matter or thing of whatsoever nature arising

thereunder or in connection therewith, including any matter or thing left
by this Contract to the discretion of the Architect; or

34.1(ii) the withholding by the Architect of any certificate to which the

Contractor may claim to be entitled to; or

34.1(iii) the measure and valuation in sub-clause 30.5(i); or

34.1(iv) the rights and liabilities of the parties under Clauses 25.0,
26.0, 31.0 or 32.0 or

34.1(v) the unreasonable withholding of consent or agreement by

the Employer or the Architect on his behalf or by the Contractor

16
 then such disputes or differences shall be referred to arbitration.”
[emphasis ours]

43. Applying sections 9(1) and (2) of the Arbitration Act 2005, it
follows that clause 34 of the governing contract comprises an
arbitration agreement.

44. It is evident from the foregoing that any dispute or difference

arising in respect of any matter arising under the governing contract
is to be referred to arbitration. Clause 34 effectively provides that
arbitration is the exclusive dispute resolution choice of the parties.

45. The clause read in its entirety warrants the construction that a
dispute relating to a claim for monies certified, countered by a defence
or set-off of defective works, “shall” be referred to arbitration. The use
of the word “shall” underscores the mandatory nature of the
agreement between the parties. The fact that the dispute falls within
the scope of the arbitration clause further fortifies this conclusion.

46. It therefore follows that unless the arbitration agreement in

Clause 34 is null, void, inoperable or incapable of being performed,
all disputes arising under the governing contract are to be referred to
arbitration.

47. In the instant appeals the more pressing question might

well be whether the position is any different where one of the
contracting parties, the Contractor here, had obtained judgment
in default in court proceedings, notwithstanding the arbitration
clause.

17
48. The plain answer can only be that it makes no difference
whatsoever. There are several reasons for this.

(i) Firstly, section 10 stipulates that the court can act only as
stipulated under the section. When analysed section 10
only allows consideration of the following matters:

(a) That there subsists an agreement to arbitrate;

(b) That no step has been taken in court proceedings
(which is not in issue here);
(c) that the arbitration agreement is not null, void,
inoperative or incapable of being performed.

Therefore from the statutory perspective, even

when a judgment in default has been procured, section
10 remains applicable. This in turn means that the Court
is bound to consider the matters set out in (a), (b) and (c)
notwithstanding the judgment in default. This is
particularly so when there are active efforts being made
to set aside the judgment in default of appearance such
that the matters in dispute can be ventilated fully by way
of arbitration.

(ii) The second reason why the judgment in default cannot or

ought not to act as a bar to arbitration is that the
Contractor, by initiating court proceedings, has effectively
breached the arbitration agreement. The commencement
of court proceedings or litigation amounts to a breach of
the arbitration agreement as contained in Clause 34.

18
 The breach of the arbitration agreement however
remains just that, namely a breach or even a repudiatory
breach, but unless and until such a breach is accepted by
the innocent party, namely the Employer, the contract
remains valid and subsisting (see section 65 of the
Contracts Act 1950).

In the instant case the “innocent party” namely the

Employer has, by conduct clearly evinced an intention to
be bound by the contract, namely to have the dispute
referred to arbitration. This is evident from the application
to set aside the judgment in default followed by the
application for a stay of proceedings. As such, the
Contractor cannot then rely on its own breach to seek to
impugn or subordinate the agreement to arbitrate. Neither
does the agreement to arbitrate stand voided or
inoperative or incapable of being performed;

(iii) Thirdly, if the commencement of litigation by the

Contractor in breach of the agreement to arbitrate in
Clause 34 is condoned, it would effectively render that
agreement nugatory. It would be open to parties to an
agreement to stipulate at the outset that the sole and
exclusive mode of dispute resolution is arbitration and
then renege on the same, in the event of a dispute, with
impunity. The intention of the parties at the point in time
when the contract was concluded would be effectively
undermined;

19
(iv) Fourthly, the Employer’s application to stay the court
proceedings pending arbitration raised a jurisdictional
point which the Court was bound to consider. This could
only have been done if the Court of Appeal had
considered the form and substance of the appeals in
totality and appreciated the significance of both
applications. While both applications were indeed
separate, i.e. the setting aside of the judgment in default
and the stay pending arbitration, it is crystal clear that the
two applications (and thus appeals) were inextricably
intertwined. It was incumbent upon the Court of Appeal to
consider the effect of hearing the first appeal relating to
the setting aside in vacuo, as it were, without even
mentioning or addressing the stay pending proceedings.
That effect was to ignore the existence of an arbitration
agreement and to exclude the application section 10 of
the Arbitration Act 2005. The Court of Appeal missed
an essential jurisdictional issue, namely whether the
dispute ought to be dealt with by way of litigation or
arbitration.

This was a relevant consideration even when

determining the appeal relating to the setting aside of the
judgment in default because the fact of the subsistence of
the arbitration agreement, a jurisdictional issue, amounted
to a matter warranting further investigation. In other words
it afforded a defence on the merits (see Evans v Bartlam
[1937] AC 473, [1937] 2 All ER 646, (1937) 53 TLR 689

20
 and Hasil Bumi Perumahan Sdn Bhd & 5 Ors v United
Malayan Banking Bhd [1994] 1 CLJ 328).

49. In all these circumstances it therefore remained incumbent

upon the Court, notwithstanding the initiation of the civil suit by the
Contractor, to carry out its function as set out in section 10, namely
to refer the dispute to arbitration unless the arbitration agreement is
null, void or inoperative. The court carries out its prescribed statutory
duty by ascertaining:

(a) whether there is an agreement to arbitrate the dispute;

(b) whether the arbitration agreement is valid or null, void or
inoperative;

Having done so, the following consequences ensue from section 10:

(a) If there is a valid agreement to arbitrate then the

court must refer the dispute to arbitration;
(b) If the agreement to arbitrate is null, void or
inoperative then the matter/suit need not be referred
to arbitration.

50. The failure of the Court of Appeal to even cite or consider these
issues amounts to a fatal flaw, warranting the intervention of this
Court.

21
(V) Is the Agreement to Arbitrate Null, Void or Inoperative or
Incapable of Being Performed?

51. Counsel for the contractor did not submit that the arbitration
agreement was null, void or inoperative. As stated earlier the thrust of
the argument was simply that a judgment of the court, albeit a
judgment in default, could not be subordinated to an arbitration
agreement such as that contained in Clause 34.

(VI) The Contractor’s Submission that There Was No Dispute

that Warranted Referral to Arbitration

52. It was also emphasised by counsel for the Contractor in the

course of the oral hearing before us that the relevant clauses of the
governing contract and case-law relating to interim certification was
such that its claim was beyond dispute. In other words, the existence
of a debt due and owing to the Contractor was undisputed. As such
the contention was that there was simply no dispute that warranted
referral to arbitration.

53. With respect this contention is flawed and affords no answer to

the Employer’s application to have the dispute referred to arbitration
for the following reasons:

(a) Under section 10 of the Arbitration Act 2005 as it

presently stands, there is no question of the Court
entering into the arena of whether or not a “dispute”
subsists between the parties. The role of the Court is

22
simply as set out in section 10, which we have explained
in extenso above.

This is borne out inter alia by the decision of the

Court of Appeal, as comprehensively explained by
Anantham Kasinather JCA in TNB Fuel Services Sdn
Bhd v. China National Coal Group Corp [2013] 1 LNS
288. His Lordship compared the present version of
section 10(1) of the Arbitration Act 2005 with the earlier
version of the section and stated:

“24. The present form of Section 10 of the

Arbitration Act 2005 is the result of the amendment
to that section which came into force on 1st July
2011 (Act A1395). It is generally accepted that the
effect of the amendment is to render a stay
mandatory unless the agreement is null and
void or impossible of performance. The Court is
no longer required to delve into the facts of the
dispute when considering an application for
stay….” (emphasis ours).

The position stated above is therefore trite,

namely that the Court is not to enquire or investigate
whether there subsists a dispute warranting referral
to arbitration. That is a matter for the consideration
and determination of the arbitral tribunal.

23
 Prior to the amendment to section 10 the
Courts expended considerable time and effort in
determining whether a ‘dispute’ subsisted by virtue
of the earlier wording of section 10:

“(1) The court before which proceedings brought in

respect of a matter which is the subject matter of an
Arbitration Agreement shall, where party makes an
application before taking any other step in the
proceedings, stay those proceedings and refer the
parties to arbitration unless it finds:-

(a) that the agreement is null and void,

inoperative or incapable of being performed; or

(b) that there is in fact no dispute between the

parties with regard to the matters to be referred.”
(emphasis ours).

(See for example Tjong Very Sumito and others

v. Antig Investments Ptd Ltd [2009] SGCA 41
which stated that “if it was at least arguable that the
matter is the subject of the arbitration agreement,
then a stay of proceedings should be ordered… it is
only in the clearest of cases that the Court ought to
make a ruling on the inapplicability of an arbitration
agreement”. This resulted in the courts undertaking
an exercise of determining whether a dispute
existed between the contracting parties.)

24
 With the removal of limb (b) however, the issue
of the subsistence or otherwise of a dispute between
the parties is rendered obsolete and irrelevant.

In the textbook entitled 'UNCITRAL Model Law &

Arbitration Rules - The Arbitration Act 2005 (Amended
2011 & 2018) and the AIAC Arbitration Rules 2018' by
Datuk Professor Sundra Rajoo (special contributor Dr
Thomas R Klotzel) 1 , the author discussed the effect of
amending section 10 of the Arbitration Act 2005 (at
pages 30 – 31):

“1.161 The amendment to section 10 removes

the courts’ power to stay arbitration proceedings
where the court is satisfied that there is no dispute
between the parties with regard to the matters to be
referred to arbitration. The old provision placed an
undue restriction on the arbitration process which
was not contained in the UNCITRAL Model Law or
the New York Convention.

1.162 In line with Article 8A of the UNCITRAL

Model Law, under the current section 10 of the AA
2005 the High Court is under the obligation to refer
the parties to arbitration unless the High Court is
satisfied that the arbitration agreement is null and
void, inoperative or incapable of being
performed….”

1
Published by Sweet & Maxwell in 2019.
25
 The Merits of the Contractor’s Contention that No
Dispute Subsists Between the parties

(b) The second reason why a stay is justified is that there is

in point of fact a dispute subsisting between the parties.
We are constrained to deal with this issue,
notwithstanding our explanation of the law above, as it
comprised a substantive part of the Contractor’s
response, in defending the appeals.

The Contractor did not submit that Clause 34 is

invalid, nor that it does not constitute a valid arbitration
agreement. It instead attempted to convince the Court to
accept that this contractual provision does not oblige all
disputes to go for arbitration. This in turn is because when
Clause 34 is read together with Clauses 30.2 and 30.3(i),
the court is to infer that interim certificates are “carved out”
or “removed” from the scope of the arbitration clause.

Clause 30.2 of the governing contract mandates

payment of certified sums and specifies how such
certificates are to be procured. It states:

“Issue of Interim Certificates

During the Period of Interim Certificates stated in the
Appendix, the Contractor shall submit details and particulars
to the Architect, sufficient for the Architect to consider and
ascertain the amount to be stated in an Interim Certificate.
Upon receipt of the Contractor’s details and particulars, the
Architect shall issue an Interim Certificate to the Contractor

26
 with a copy to the Employer, and the Contractor shall be
entitled to payment thereafter within the Period of Honouring
Certificates stated in the Appendix. Provided always that the
Architect shall have the discretion to make interim valuations
whenever he considers necessary for ascertaining the
amount to be stated as due in an Interim Certificate.”

Clause 30.3 (i) provides that the Employer is not

entitled to withhold or deduct any amount certified as due
under the certificates by way of set-off or counterclaim or
allegation of defective works, unless otherwise expressly
provided in the contract. It reads:

“No Entitlement to Set-Off by Employer in Respect of

Amount Stated in Interim Certificates

Unless otherwise expressly provided in these Conditions, the

Employer shall not be entitled to withhold or deduct any
amount certified as due under any Architect’s certificates by
reason of any claims to set-off or counterclaims or allegation
of defective works, materials or goods or for any other
reasons whatsoever which he may purport to excuse him
from making payments of the amount stated to be due in an
Interim Certificate.”

For the Contractor it was submitted that when

clause 34 is read with and in the light of clauses 30.2 and
30.3 (i), the effect is that disputes on the interim
certificates are “carved out” and not subject to arbitration.

27
 It was further submitted that the court must consider
the contract in its entirety, give effect to every clause and
harmonise each clause with the other clauses.

However in making this submission, counsel for the

Contractor failed and neglected to bring the attention of
the Court to the clause immediately following upon 30.3(i)
namely Clause 30.3 (ii) which reads as follows:

“Disputes of Difference in Respect of Right to Set-Off, to

Arbitration

In the event of any disputes or differences as to any rights of

the Employer to set off or to any counterclaim or any
allegations of defective works, materials or goods or for any
other reasons then such disputes or differences shall be
referred to an arbitrator for judgment under Clause 34.0.”

It is clear from this clause that the Employer enjoys

and is entitled to refer any disputes or differences in
relation to set-offs or counterclaims or any allegations of
defective works or for any other reason whatsoever to an
arbitrator under Clause 34.

What is clearer still is that by referring solely to

Clauses 30.2 and 30.3(i), counsel for the Contractor
chose, deliberately or otherwise, to submit to the Court
that disputes relating to defective works giving rise in turn
to set-offs were effectively NOT to be referred to
arbitration as they were carved out. This is patently

28
 incorrect given the express provision of Clause 30.3(ii).
Contrary to what was submitted, it provides that in the
event of disputes relating to the Employer’s right to set-off
from the interim certificates by reason of defective works,
such disputes were mandatorily required to be referred to
arbitration as set out in Clause 34. The use of the words
“shall be referred to an arbitrator for judgment under
Clause 34.0” bears this out.

At best, this submission on behalf of the Contractor was

“selective reading”, and at worst concealment of a wholly
relevant contractual provision.

(VII) Duty of Advocates and Solicitors to the Court

54. These submissions by the Contractor serve as an appropriate

occasion for this Court to reiterate the oft- ignored principle that
advocates and solicitors are officers of the court. Their overriding duty
is to the Court, not their clients. As such they are under a duty to
provide honest and complete submissions. Integrity is of the utmost
importance in advocacy, whether oral or written.

55. It follows sine qua non that suppression, or deliberately

presenting a legal position that does not fully disclose the facts or the
law, is a grave dereliction of the responsibilities of an advocate and
solicitor. They are duty bound not to suppress facts or law which are
either against their client’s case, or does not support it, because of
their overriding duty to the court, and ultimately the administration of
justice as a whole.

29
56. On this issue Raja Azlan Shah Ag. LP (as His Royal Highness
then was) approved of the following passage in Jaginder Singh &
Ors v The Attorney-General:2

“...The Court can dispense justice only if Counsel will not mislead,
otherwise justice will suffer from the infirmity of the Court itself being devoid
of justice. People seldom pause to ask sometimes what safety the ordinary
individual has in the hands of the lawyers if the Court itself, in which he
seeks redress, is no longer safe to be in the same hands.”

(See also the cases cited at paragraphs 8 – 9 of Lord Clarke of

Stone-cum-Ebony’s speech to the Malaysian judiciary on 14
September 2011 entitled “Ethics and Civil Procedure” 3 , the
English cases of Saif Ali v Sydney Mitchell [1980] AC 198 and
Arthur Hall v Simons [2002] 1 AC 615 at p.686 and p.692
(particularly the judgments of Lord Hoffman and Lord Hope in
the latter case) as well as the Australian case of Giannarelli v
Wraith, Shulkes v Wraith [1988] 81 ALR 417 at p.421.).

57. In the instant appeals it is trite that the governing contract must
be read and construed holistically and that the parties are not entitled
to pick and choose clauses which are in their favour and ignore
clauses which do not support their case.

58. In these circumstances the Contractor’s submission that there

was no dispute warranting referral to arbitration pursuant to Clause

2
Jaginder Singh & Ors v The Attorney-General [1983] CLJ Rep 176, at page 178.
3
Accessed at http://www.kehakiman.gov.my/sites/default/files/ETHICS%20for%
20Malaysian%20Judges%20O%202011_.pdf on 30.09.2019.
30
34 is misguided and has no merit whatsoever. The Court of Appeal
therefore erred in determining that there were no merits in the
defence, and that the Contractor was undisputably entitled to the sum
claimed. The affirmation of the judgment in default was therefore
flawed.

59. In its written submissions, the Contractor also alleged inter alia
(as summarised above) that a judgment of the High Court has
constitutional force and recognition under Article 121(3) of the
Federal Constitution. As such it has full force and effect according
to its tenor throughout the Federation and may be executed or
enforced accordingly. This submission is irrelevant to the issues in
this appeal as the validity of a judgment in default in the context of an
imminent execution or a winding up action is not the subject matter of
these appeals.

60. In these latter cases, undoubtedly a judgment in default stands

and may be executed upon and enforced. However the issues here
relate to the agreement of the parties to arbitrate, and the failure by
the Contractor to honour that agreement and to initiate court
proceedings, in breach of such agreement. When the judgment in
default is in issue and is sought to be set aside to allow the arbitration
to prevail, as agreed by the parties, what course of action should be
adopted by the Court? As we have discussed at length, section 10
comes into play. Therefore the reference to Article 123 is misplaced
and fails to address or provide any form of response to the matters to
be adjudicated upon here.

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61. The other submission that the doctrine of merger prevents an
arbitration clause from ‘severing’ a judgment because the cause of
action has merged in the judgment and the judgment acquires a
higher status [per Lord Sumption in Virgin Atlantic Airways Limited
(Respondent) v Zodiac Seats UK Limited [2013] UKSC 46] is
similarly inapplicable in the instant appeal. A cursory reading of the
case discloses that it is a judgment relating to the adjudication of
patents which went through a full trial in the English Courts. The
appeal in the Supreme Court of the United Kingdom relates primarily
to the problems arising from the system of parallel jurisdiction for
determining the validity of European patents. Its relationship to the
instant appeals is completely obscure.

62. A passage mid-way in the judgment of Lord Sumption appears

to have been selected and randomly cited. At paragraph 16 of the
judgment, the issue in the appeal is set out, namely that an order of
the Court of Appeal upholding the validity of the patent and directing
an enquiry as to damages may only be varied by way of an appeal.
However no further avenues of appeal were open. The issue before
the Court was whether one of the parties was entitled to contend in
the inquiry that there were no damages because the patent had been
retrospectively amended so as to remove the claims held to have
been infringed. This in turn depended upon whether the Court of
Appeal was correct to state that its order declaring the patent to be
valid continued to bind the parties per rem judicatum notwithstanding
that the patent was later amended on the basis that it was not valid in
the relevant aspects.

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63. It is in this context that Lord Sumption made a statement on the
doctrine of merger, in relation to res judicata. He explained the
doctrine of merger as treating a cause of action as extinguished, once
a judgment has been given upon it, and the claimant’s sole right as
being a right upon the judgment. He also stated that this principle is a
substantive rule about the legal effect of an English judgment which
is regarded as of a higher nature and therefore as superseding the
underlying cause of action, premised upon a decision dating back to
1844 (King v Hoare) (1844) 13 M & W).

64. The nexus to the present appeals is baffling. This is particularly

so, as no rational or legal coherence was drawn between the doctrine
of merger and an application to set aside a judgment in default
coupled with a stay pending arbitration.

65. If it was the intent of counsel to suggest that the cause of action
that subsisted was merged in the judgment in default and accordingly
the agreement to arbitrate could not survive such a merger, as the
plaintiff/Contractor’s sole right was that on the judgment, then it is a
non-starter.

66. These principles were made by Lord Sumption in the context of

res judicata. Res judicata is inapplicable in the present context as the
merits of the case have not and were not determined by the
Contractor simply obtaining a judgment in default, which was sought
to be set aside. The fact that the Court of Appeal erroneously upheld
the judgment in default and wholly disregarded the agreement to
arbitrate, does not afford the Contractor the basis to contend in these
appeals, (where the Court of Appeal’s decision is being challenged)

33
that the agreement to arbitrate stands vitiated by reason of the
doctrine of merger ensuing from the principle of res judicata.

67. Reverting to the issue of advocacy, written or oral, it bears

reiterating that if a passage in a judgment is sought to be relied upon,
it is incumbent upon counsel to set out and explain:

(a) How the passage cited is applicable to the matter before

the court;
(b) The nature of the case cited;
(c) The facts of the case, particularly whether and how such
facts are relevant, similar or distinguishable from the
matter before the court;
(d) The context in which the statement relied upon was made;
(e) Whether the statement amounts to the ratio or is obiter or
(f) Whether the case is being cited for a principle of general
application; and
(g) Whether the statement comprises an expansion of an
existing principle.

68. Otherwise such a randomly cited passage is of little or no

assistance to a Court in adjudicating on a matter. Similarly the
contention that res judicata prevents the “arbitration clause from
severing the judgment in default” lacks clarity and coherent legal
reasoning.

69. Res judicata as we know and understand it extinguishes a

cause of action once a matter has been adjudicated upon its merits.
That is not the case here. These appeals relate to a case where

34
judgment was obtained because no appearance was entered. The
defects complained of by the Employer were never heard nor dealt
with notwithstanding the arbitration agreement. The principle or
doctrine cannot therefore ‘bite’. Put another way it is simply
inapplicable to the present factual and legal matrix, particularly when
the judgement in default is being actively sought to be set aside. The
attempt to stifle the Employer form having its case heard by way of
arbitration, as agreed between the parties amounts to a breach of the
fundamental principles of natural justice.

70. Finally the submission for the Contractor that any subordination
of a judgment of the High Court had to be specifically and deliberately
legislated is misplaced as the effect of Clause 34 is not to subordinate
a judgment in default. Neither does section 10 of the Arbitration Act
2005 have the effect of ‘subordinating’ a judgment in default. This is
because the parties had chosen and agreed to arbitration as the sole
and exclusive mode of dispute resolution in respect of any dispute or
difference arising from this contract. The breach of this agreement by
the Contractor and the subsequent obtaining of a judgment in default
cannot then be said to amount to a subordination of a judgment by an
arbitration clause.

71. In point of fact if this form of legal rationale is allowed to persist,

as stated earlier, all forms of dispute resolution agreed to between
parties in their contracts would be rendered ineffectual and nugatory
as it would be open to one party to breach the same and effectively
put an end to the agreement to resolve disputes by way of arbitration.
The defaulting party would be effectively ‘rewarded’ for breaching the

35
agreement to arbitrate. This is the very mischief which section 10
seeks to prohibit.

Appellate Intervention

72. For the reasons stated above we determined that the Court of
Appeal had erred in law in arriving at the decision it did. The Court of
Appeal erred in that it:

a. Failed to give consideration to the nature of the two

appeals before it. It simply determined the appeal relating
to the setting aside of the judgment in default in vacuo,
disregarding the fact that the second appeal related to a
stay pending arbitration. This approach was flawed. The
Court of Appeal ought to have ascertained the nature of
each of the appeals and taken into consideration that one
related to a section 10 application, which should
therefore have been dealt with first;

b. Even if the appeal relating to the judgment in default was

heard first, the Court of Appeal should have considered
that the existence of an agreement to arbitrate coupled
with section 10 of the Arbitration Act 2005 warranted
the conclusion that this amounted to a defence on the
merits. Accordingly the judgment in default ought to have
been set aside and the matter referred to arbitration in
accordance with the statutory requirements of section 10;

36
 (c) The Court of Appeal erred in that it effectively only
considered one of the appeals before it and let the result
of that appeal determine the result of the second appeal.
In other words the second appeal was never considered
on its merits. It amounted to a failure to adjudicate on the
second appeal;

(d) The Court of Appeal erred in failing to consider or give

effect to the relevant provisions of the Arbitration Act in
failing to consider the arbitration clause and to give effect
to the relevant provisions and purpose of the Arbitration
Act 2005. If it had done so it would have concluded that
the dispute between the Employer and the Contractor had
to be referred to arbitration in accordance with the
agreement encapsulated in clause 34 of the governing
contract; and

(e) The Court of Appeal erred in its adjudication on the

subject matter of the appeal before it relating to the
judgment in default in that it erroneously concluded that
there was no defence on the merits. If it had read or
considered clause 30.3(ii) of the governing contract it
would have realized that the Employer was entitled to
raise allegations of defective works in response to claims
by the Contractor under the interim certificates and have
such dispute/s referred to arbitration.

73. We were therefore constrained to intervene, reverse the

decision of the Court of Appeal, and reinstate the decision of the High

37
Court. In so doing we reminded ourselves of the confines within which
this court, as an appellate court, is bound to exercise its powers. It is
only to do so in the face of clear errors of law (see MMC Oil & Gas
Engineering Sdn Bhd v Tan Bock Kwee & Sons Sdn Bhd [2016]
2 MLJ 428; Henderson v Foxworth Investments Limited [2014]
UKSC 41).

74. Applying the foregoing principles, we concluded that the Court

of Appeal had wrongly interfered in the decision of the High Court.
The High Court judge had not erred in law or on the facts in upholding
the setting aside of the judgment in default and in allowing the stay of
court proceedings pending arbitration.

75. We were satisfied that there were clear errors of law in the
decision of the Court of Appeal and that it was plainly wrong.

Answers to the Questions of Law

Question 1: Can a Judgment in Default in Court be sustained when

the plaintiff who obtained the Judgment in Default is bound by a valid
Arbitration Agreement/Clause and the defendant has raised disputes
to be ventilated via Arbitration pursuant to the Arbitration Clause?

Answer: We answer the question in the negative.

Question 2: Should the Court in hearing an application to set aside

the Judgment in Default where a valid Arbitration Clause is binding on
parties consider the “merits” or “existence” of the disputes raised by
the defendant?

38
Answer: We answer the question in the negative.

By way of conclusion we reiterate our decision handed down on 19

September 2019. Both appeals were allowed with costs of RM20,000-
00 to the appellant, subject to allocatur. The order of the Court of
Appeal was set aside and the order of the High Court reinstated.

Signed
NALLINI PATHMANATHAN
Judge
Federal Court of Malaysia

Dated : 17 February 2020

For the Appellant : Justin Voon

(Cheng Sing Yih with him)
Messrs Justin Voon Chooi & Wing
Advocates and Solicitors
d6-5-13A, Bangunan Perdagangan d6
801, Jalan Sentul
51000 Kuala Lumpur

For the Respondent : Chew Chang Min

(Liza Chan Sow Keng & Shareen Tan Sze
Ying with him)
Messrs Liza Chan & Co
Advocates and Solicitors
No. 15 Jalan Timur, Section 9
46000 Petaling Jaya
Selangor Darul Ehsan

39